Insurance and Environment

VOICES FROM THE INDUSTRY: Life cycle costing process looks beyond initial price

May 22, 2006

The clients of most large contractors are typically as varied as the buildings they have us construct.

Some buyers of construction are satisfied if they can simply get a building erected as quickly as possible at the lowest possible costs and are willing to make compromises in quality and workmanship. More sophisticated buyers are increasingly turning to a process called life cycle costing, or LLC.

This process takes into consideration not only the initial price, but also the cost of operating and maintaining the building or building components over their expected life expectancy.

More specifically, life cycle costing is an attempt to analyze and account for such diverse aspects as the purchase of land, the cost of design and construction, operating and maintenance costs, insurance cost, depreciation, and interest finance cost.

The importance of LCC can be better appreciated when you realize that over a 30-year life of a building, only 2 percent of the total life cost is the initial building cost, while 6 percent is the cost of operating and maintaining the building.

The other 92 percent of life cost is personnel salaries.

Admittedly, some of those numbers are difficult to calculate over a long period. Energy costs, for example, are often difficult to predict in the design phase of a project.

Assumptions must be made about use profiles, occupancy rates, and schedules, all of which impact energy consumption. However, current prices are known and there are sources for energy price escalation projections.

LCC is especially useful when project alternatives fulfill the same performance, but differ to initial costs and operating costs.

Measuring tools

An example of this is the selection of mechanical systems. A given building can function with any one of several system types and energy sources. This is a very applicable LCC analysis since the initial cost of an HVAC system is 43 percent and energy costs are 50 percent over a 30-year life.

Initial costs, annual maintenance costs, and energy usage can be determined with quite a high degree of precision.

This data along with other financial information can be inputted into sophisticated building energy and economic analysis software programs such as Trace 700, which is a product of the Trane Company. The output is the total life cycle cost and the annual cost for the system.

In addition, the annual cash flow is calculated to present value for each year.

Besides the Trace program, there are numerous LCC design and analysis tools.

The U.S. Department of Energy has a well-established federal energy management program. It outlines life cycle cost methodology and procedures that conform to the Federal Energy Management Improvement Act of 1988 and subsequent energy conservation legislation.

FEMP provides software, training, publications, and guidance on how to apply LCC to evaluate the cost-effectiveness of energy and water investments.

Life cycle cost analysis can be performed at various levels of complexity. One recent example was a study of athletic field surfaces, which compared natural grass to various artificial-turf fields. While this did not involve a computer program, it took into account initial costs, as well as mowing costs, irrigation water costs, striping, fertilization, and re-building cost.

For informational purposes, the artificial turf was more economical over a 15-year period and had the added benefit of being safer than natural grass.

Complete collaboration

Life cycle costing analysis requires the collaboration of the entire project team, starting with preparation of initial cost estimates.

In the above examples, the engineer of record provided the Trace 700 services, and the owner provided maintenance costs for grass football fields.

LCC must be done early in the design phase when there is still a chance to refine the design to achieve the reduction in life cycle costs.

Life cycle costing is not a precise science. Nevertheless, it is a very useful tool for long-range planning and investment decisions because it forces examination of numerous factors that can be overlooked if the focus is merely on getting the building ready for the ribbon cutting.

The Sustainable Building Industry Council is also involved in LCC, because it promotes energy consciousness and is good for the environment.




Greene is executive vice president of operations of Geupel DeMars Hagerman, LLC, an Indianapolis-based construction management firm. Views expressed here are the writer's.
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